Edgar Filing: PRUDENTIAL FINANCIAL INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)



New Jersey	22-3703799
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 31, 2016, 430 million shares of the registrant’s Common Stock (par value $0.01) were outstanding.

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TABLE OF CONTENTS



		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2016 and December 31, 2015	1
	Unaudited Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015	2
	Unaudited Interim Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015	3
	Unaudited Interim Consolidated Statements of Equity for the nine months ended September 30, 2016 and 2015	4
	Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
	1. Business and Basis of Presentation	6
	2. Significant Accounting Policies and Pronouncements	7
	3. Acquisitions	10
	4. Investments	11
	5. Variable Interest Entities	30
	6. Closed Block	32
	7. Equity	34
	8. Earnings Per Share	38
	9. Short-Term and Long-Term Debt	41
	10. Employee Benefit Plans	43
	11. Segment Information	44
	12. Income Taxes	50
	13. Fair Value of Assets and Liabilities	50
	14. Derivative Instruments	87
	15. Commitments and Guarantees, Contingent Liabilities and Litigation and Regulatory Matters	95
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	101
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	187
Item 4.	Controls and Procedures	187
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	188
Item 1A.	Risk Factors	188
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	188
Item 6.	Exhibits	189
SIGNATURES		190
EXHIBIT INDEX		191

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Forward-Looking Statements

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of fixed income, equity, real estate and other financial markets; (2) the availability and cost of additional debt or equity capital or external financing for our operations; (3) interest rate fluctuations or prolonged periods of low interest rates; (4) the degree to which we choose not to hedge risks, or the potential ineffectiveness or insufficiency of hedging or risk management strategies we do implement; (5) any inability to access our credit facilities; (6) reestimates of our reserves for future policy benefits and claims; (7) differences between actual experience regarding mortality, morbidity, persistency, utilization, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8) changes in our assumptions related to deferred policy acquisition costs, value of business acquired or goodwill; (9) changes in assumptions for our pension and other post-retirement benefit plans; (10) changes in our financial strength or credit ratings; (11) statutory reserve requirements associated with term and universal life insurance policies under Regulation XXX and Guideline AXXX; (12) investment losses, defaults and counterparty non-performance; (13) competition in our product lines and for personnel; (14) difficulties in marketing and distributing products through current or future distribution channels; (15) changes in tax law; (16) economic, political, currency and other risks relating to our international operations; (17) fluctuations in foreign currency exchange rates and foreign securities markets; (18) regulatory or legislative changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the U.S. Department of Labor’s fiduciary rules; (19) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (20) adverse determinations in litigation or regulatory matters, and our exposure to contingent liabilities, including related to the remediation of certain securities lending activities administered by the Company; (21) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (22) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (23) possible difficulties in executing, integrating and realizing projected results of acquisitions, divestitures and restructurings; (24) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (25) changes in statutory or U.S. GAAP accounting principles, practices or policies; and (26) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and the ability of the subsidiaries to pay such dividends or distributions in light of our ratings objectives and/or applicable regulatory restrictions. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2015 for discussion of certain risks relating to our businesses and investment in our securities.

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Throughout this Quarterly Report on Form 10-Q, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “Prudential Insurance” refers to The Prudential Insurance Company of America. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

September 30, 2016 and December 31, 2015 (in millions, except share amounts)



	September 30, 2016			December 31, 2015
ASSETS
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016-$297,745; 2015-$265,416)(1)	$	343,244		$	290,323
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2016-$2,956; 2015-$2,624)(1)	2,471			2,308
Trading account assets supporting insurance liabilities, at fair value(1)	21,828			20,522
Other trading account assets, at fair value(1)	7,559			14,458
Equity securities, available-for-sale, at fair value (cost: 2016-$7,197; 2015-$6,847)	9,765			9,274
Commercial mortgage and other loans (includes $572 and $274 measured at fair value under the fair value option at September 30, 2016 and December 31, 2015, respectively)(1)	52,273			50,559
Policy loans	12,031			11,657
Other long-term investments (includes $1,500 and $1,322 measured at fair value under the fair value option at September 30, 2016 and December 31, 2015, respectively)(1)	11,346			9,986
Short-term investments	5,254			8,105
Total investments	465,771			417,192
Cash and cash equivalents(1)	24,728			17,612
Accrued investment income(1)	3,279			3,110
Deferred policy acquisition costs	16,975			16,718
Value of business acquired	2,159			2,828
Other assets(1)(2)	15,403			14,225
Separate account assets	291,550			285,570
TOTAL ASSETS	$	819,865		$	757,255
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits	$	252,228		$	224,384
Policyholders’ account balances(1)	146,577			136,784
Policyholders’ dividends	7,482			5,578
Securities sold under agreements to repurchase	6,830			7,882
Cash collateral for loaned securities	5,037			3,496
Income taxes	15,326			8,714
Short-term debt	907			1,216
Long-term debt(2)	18,758			19,594
Other liabilities(1)	15,474			13,517
Notes issued by consolidated variable interest entities (includes $2,722 and $8,597 measured at fair value under the fair value option at September 30, 2016 and December 31, 2015, respectively)(1)	2,722			8,597
Separate account liabilities	291,550			285,570
Total liabilities	762,891			715,332
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 15)
EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)	0			0
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 660,111,339 shares issued at both September 30, 2016 and December 31, 2015)	6			6
Additional paid-in capital	24,520			24,482
Common Stock held in treasury, at cost (228,406,976 and 213,009,970 shares at September 30, 2016 and December 31, 2015, respectively)	(14,989		)	(13,814		)
Accumulated other comprehensive income (loss)	24,925			12,285
Retained earnings	21,969			18,931
Total Prudential Financial, Inc. equity	56,431			41,890
Noncontrolling interests	543			33
Total equity	56,974			41,923
TOTAL LIABILITIES AND EQUITY	$	819,865		$	757,255

__________


(1)	See Note 5 for details of balances associated with variable interest entities.


(2)	Prior period amounts are presented on a basis consistent with the current period presentation, reflecting the adoption of ASU 2015-03. See Note 2 for additional information.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2016 and 2015 (in millions, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
REVENUES
Premiums	$	9,635		$	5,985		$	22,867		$	20,214
Policy charges and fee income	1,540			1,624			4,415			4,482
Net investment income	4,073			3,741			11,532			11,181
Asset management and service fees	955			946			2,780			2,854
Other income	(55		)	(397		)	8			(58		)
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(29		)	(81		)	(204		)	(149		)
Other-than-temporary impairments on fixed maturity securities transferred to Other comprehensive income	0			8			38			39
Other realized investment gains (losses), net	842			1,773			4,293			4,300
Total realized investment gains (losses), net	813			1,700			4,127			4,190
Total revenues	16,961			13,599			45,729			42,863
BENEFITS AND EXPENSES
Policyholders’ benefits	10,155			6,648			25,175			21,739
Interest credited to policyholders’ account balances	824			840			3,168			2,749
Dividends to policyholders	569			367			1,433			1,585
Amortization of deferred policy acquisition costs	115			922			1,744			1,846
General and administrative expenses	2,983			2,773			8,821			8,018
Total benefits and expenses	14,646			11,550			40,341			35,937
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	2,315			2,049			5,388			6,926
Total income tax expense (benefit)	501			584			1,300			1,962
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES	1,814			1,465			4,088			4,964
Equity in earnings of operating joint ventures, net of taxes	18			2			38			8
INCOME (LOSS) FROM CONTINUING OPERATIONS	1,832			1,467			4,126			4,972
Income (loss) from discontinued operations, net of taxes	0			0			0			0
NET INCOME (LOSS)	1,832			1,467			4,126			4,972
Less: Income (loss) attributable to noncontrolling interests	5			2			42			65
NET INCOME (LOSS) ATTRIBUTABLE TO PRUDENTIAL FINANCIAL, INC.	$	1,827		$	1,465		$	4,084		$	4,907
EARNINGS PER SHARE
Basic earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	4.14		$	3.22		$	9.16		$	10.74
Income (loss) from discontinued operations, net of taxes	0.00			0.00			0.00			0.00
Net income (loss) attributable to Prudential Financial, Inc.	$	4.14		$	3.22		$	9.16		$	10.74
Diluted earnings per share-Common Stock:
Income (loss) from continuing operations attributable to Prudential Financial, Inc.	$	4.07		$	3.16		$	9.02		$	10.56
Income (loss) from discontinued operations, net of taxes	0.00			0.00			0.00			0.00
Net income (loss) attributable to Prudential Financial, Inc.	$	4.07		$	3.16		$	9.02		$	10.56
Dividends declared per share of Common Stock	$	0.70		$	0.58		$	2.10		$	1.74

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2016 and 2015 (in millions)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016		2015
NET INCOME (LOSS)	$	1,832		$	1,467		$	4,126	$	4,972
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments for the period	697			(96		)	1,980		(259		)
Net unrealized investment gains (losses)	(678		)	169			16,642		(4,043		)
Defined benefit pension and postretirement unrecognized periodic benefit (cost)	44			47			117		153
Total	63			120			18,739		(4,149		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)	(240		)	68			6,051		(1,501		)
Other comprehensive income (loss), net of taxes	303			52			12,688		(2,648		)
Comprehensive income (loss)	2,135			1,519			16,814		2,324
Less: Comprehensive income (loss) attributable to noncontrolling interests	50			(5		)	90		4
Comprehensive income (loss) attributable to Prudential Financial, Inc.	$	2,085		$	1,524		$	16,724	$	2,320

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Equity

Nine Months Ended September 30, 2016 and 2015 (in millions)



	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2015	$	6	$	24,482		$	18,931		$	(13,814	)	$	0		$	12,285		$	41,890		$	33		$	41,923
Cumulative effect of adoption of accounting changes						11												11			(30		)	(19		)
Common Stock acquired									(1,375		)							(1,375		)				(1,375		)
Class B Stock repurchase adjustment						(119		)										(119		)				(119		)
Contributions from noncontrolling interests																					9			9
Distributions to noncontrolling interests																					(30		)	(30		)
Consolidations/(deconsolidations) of noncontrolling interests																					471			471
Stock-based compensation programs			38						200									238						238
Dividends declared on Common Stock						(938		)										(938		)				(938		)
Comprehensive income:
Net income (loss)						4,084												4,084			42			4,126
Other comprehensive income (loss), net of tax															12,640			12,640			48			12,688
Total comprehensive income (loss)																		16,724			90			16,814
Balance, September 30, 2016	$	6	$	24,520		$	21,969		$	(14,989	)	$	0		$	24,925		$	56,431		$	543		$	56,974

	Prudential Financial, Inc. Equity
	Common Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Class B Stock Held in Treasury			Accumulated Other Comprehensive Income (Loss)			Total Prudential Financial, Inc. Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2014	$	6	$	24,565		$	14,888		$	(13,088	)	$	(651	)	$	16,050		$	41,770		$	579		$	42,349
Common Stock acquired									(750		)							(750		)				(750		)
Class B Stock canceled			(167		)	(484		)				651						0						0
Contributions from noncontrolling interests																					28			28
Distributions to noncontrolling interests																					(416		)	(416		)
Consolidations (deconsolidations) of noncontrolling interests																					(145		)	(145		)
Stock-based compensation programs			(50		)				226									176						176
Dividends declared on Common Stock						(796		)										(796		)				(796		)
Comprehensive income:
Net income (loss)						4,907												4,907			65			4,972
Other comprehensive income (loss), net of tax															(2,587		)	(2,587		)	(61		)	(2,648		)
Total comprehensive income (loss)																		2,320			4			2,324
Balance, September 30, 2015	$	6	$	24,348		$	18,515		$	(13,612	)	$	0		$	13,463		$	42,720		$	50		$	42,770

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015 (in millions)



	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	4,126		$	4,972
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net	(4,127		)	(4,190		)
Policy charges and fee income	(1,417		)	(1,382		)
Interest credited to policyholders’ account balances	3,168			2,749
Depreciation and amortization	402			126
(Gains) losses on trading account assets supporting insurance liabilities, net	(361		)	365
Change in:
Deferred policy acquisition costs	(391		)	(115		)
Future policy benefits and other insurance liabilities	7,668			4,655
Other trading account assets	(54		)	118
Income taxes	797			1,295
Derivatives, net	7,443			3,048
Other, net	(216		)	189
Cash flows from (used in) operating activities	17,038			11,830
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	36,420			35,030
Fixed maturities, held-to-maturity	205			179
Trading account assets supporting insurance liabilities and other trading account assets	24,720			10,620
Equity securities, available-for-sale	2,798			3,707
Commercial mortgage and other loans	4,522			3,904
Policy loans	1,727			1,641
Other long-term investments	457			989
Short-term investments	35,728			57,142
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(49,467		)	(33,792		)
Trading account assets supporting insurance liabilities and other trading account assets	(26,049		)	(13,891		)
Equity securities, available-for-sale	(2,413		)	(3,115		)
Commercial mortgage and other loans	(6,011		)	(7,479		)
Policy loans	(1,402		)	(1,320		)
Other long-term investments	(1,537		)	(1,620		)
Short-term investments	(33,196		)	(56,803		)
Acquisition of business, net of cash acquired	(532		)	0
Derivatives, net	718			(411		)
Other, net	228			56
Cash flows from (used in) investing activities	(13,084		)	(5,163		)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits	22,207			17,743
Policyholders’ account withdrawals	(17,514		)	(16,322		)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities	488			(1,300		)
Cash dividends paid on Common Stock	(939		)	(801		)
Net change in financing arrangements (maturities 90 days or less)	516			234
Common Stock acquired	(1,339		)	(744		)
Class B stock acquired	(119		)	(651		)
Common Stock reissued for exercise of stock options	112			158
Proceeds from the issuance of debt (maturities longer than 90 days)	1,449			4,577
Repayments of debt (maturities longer than 90 days)	(1,452		)	(3,922		)
Excess tax benefits from share-based payment arrangements	4			18
Other, net	(611		)	(424		)
Cash flows from (used in) financing activities	2,802			(1,434		)
Effect of foreign exchange rate changes on cash balances	360			56
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	7,116			5,289
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	17,612			14,918
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	24,728		$	20,207
NON-CASH TRANSACTIONS DURING THE PERIOD(1)
Treasury Stock shares issued for stock-based compensation programs	$	113		$	111
Significant Pension Risk Transfer transactions:
Assets acquired, excluding cash and cash equivalents acquired	$	2,388		$	1,553
Liabilities assumed	3,215			1,919
Net cash received	$	827		$	366

_______

1) See Note 2 for the impact of the adoption of “ASU 2015-02, Consolidation” on the Consolidated Financial Statements.

See Notes to Unaudited Interim Consolidated Financial Statements

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company” or “PFI”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, retirement-related services, mutual funds and investment management.

From December 18, 2001, the date of demutualization, through December 31, 2014, the Company organized its principal operations into the Financial Services Businesses and the Closed Block Business, and had two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU), reflected the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and did not trade on any exchange, reflected the performance of the Closed Block Business.

On January 2, 2015, Prudential Financial repurchased and canceled all of the shares of the Class B Stock (the “Class B Repurchase”). As a result, the Company no longer organizes its principal operations into the Financial Services Businesses and the Closed Block Business. The Company’s principal operations are comprised of four divisions: the U.S. Retirement Solutions and Investment Management division, the U.S. Individual Life and Group Insurance division, the International Insurance division and the Closed Block division. The Closed Block division is accounted for as a divested business that is reported separately from the divested businesses that are included in the Company’s Corporate and Other operations. The Company’s Corporate and Other operations include corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested, excluding the Closed Block division.

Basis of Presentation

As a result of the Class B Repurchase and resulting elimination of the separation of the Financial Services Businesses and the Closed Block Business, these Unaudited Interim Consolidated Financial Statements refer to the divisions and segments of the Company that formerly comprised the Financial Services Businesses as “PFI excluding Closed Block division” and refer to the operations that were formerly included in the Closed Block Business as the “Closed Block division,” except as otherwise noted. Closed Block Business results were associated with the Company’s Class B Stock for periods prior to January 1, 2015.

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. See Note 5 for more information on the Company’s consolidated variable interest entities. The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) consolidated operations use a November 30 fiscal year end for purposes of inclusion in the Company’s Consolidated Financial Statements. The Company’s unaudited interim consolidated balance sheet data as of September 30, 2016, include the assets and liabilities of Gibraltar Life as of August 31, 2016. The Company’s unaudited interim consolidated income statement data include Gibraltar Life’s results of operations for the three and nine months ended August 31, 2016 and 2015, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The most significant estimates include those used in determining deferred policy acquisition costs (“DAC”) and related amortization; value of business acquired (“VOBA”) and its amortization; amortization of deferred sales inducements (“DSI”); measurement of goodwill and any related impairment; valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal matters.

Out of Period Adjustments

During the second quarter of 2016, the Company recorded an out of period adjustment resulting in a decrease of $148 million to “Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures,” which is reflected in the three month period ended June 30, 2016 and the nine month period ended September 30, 2016. The adjustment reflects a charge to increase reserves, net of a related increase in DAC, for certain universal life products within the Individual Life business. Management evaluated the adjustment and concluded it was not material to the current period or to any previously reported quarterly or annual financial statements. For additional information on the impact of this adjustment to the Company’s operating segments, see Note 11.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

This section supplements, and should be read in conjunction with, Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Adoption of New Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (“FASB”) issued guidance (Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)) to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2015, and was applied retrospectively. Adoption of the guidance did not have a significant effect on the Company’s financial statement disclosures, see Note 13.

In April 2015, the FASB issued updated guidance (ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs) that simplifies the presentation of debt issuance costs. The pronouncement requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The Company adopted the guidance effective January 1, 2016. Prior period financial information presented in these financial statements has been adjusted to reflect the retrospective adoption of the amended guidance. “Other assets” and “Long-term debt” as previously reported on the Company’s consolidated statements of financial position as of December 31, 2015 were both reduced by $133 million as a result of this retrospective adoption.

In February 2015, the FASB issued updated guidance (ASU 2015-02, Consolidation (Topic 810): Amendments to Consolidation Analysis) that modifies the rules regarding consolidation. The pronouncement eliminates specialized guidance for limited partnerships and similar legal entities, and removes the indefinite deferral for certain investment funds. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted the updated guidance effective January 1, 2016 and applied the modified retrospective method of adoption, primarily resulting in the deconsolidation of certain of its previously consolidated collateralized loan obligations (“CLOs”), as its fee arrangements are no longer deemed variable interests in these entities. The Company continues to consolidate CLOs where it retains other economic interests which absorb more than an insignificant amount of the CLOs expected variability. The Company also deconsolidated certain investment structures where it is no longer deemed to be the primary beneficiary as the Company, through its equity ownership, no longer has the obligation to absorb losses of the VIE that could be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The impact to the Company’s consolidated statements of financial position upon adoption of the updated guidance was a reduction of $5.5 billion of “Total assets” (including $5.1 billion of “Total investments”) and $5.5 billion of “Total liabilities” (including $5.1 billion of “Notes issued by consolidated variable interest entities”), with a $30 million decrease in “Noncontrolling interests” and a $7 million increase to “Total Prudential Financial, Inc. equity.”

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In August 2014, the FASB issued updated guidance (ASU 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure) requiring that mortgage loans be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In August 2014, the FASB issued updated guidance (ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity) for measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. Under the guidance, an entity within scope is permitted to measure both the financial assets and financial liabilities of a consolidated collateralized financing entity based on either the fair value of the financial assets or the financial liabilities, whichever is more observable. If adopted, the guidance eliminates the measurement difference that exists when both are measured at fair value. The Company adopted the updated guidance effective January 1, 2016, and applied the modified retrospective method of adoption. The impact to the Company’s consolidated statements of financial position upon adoption of the updated guidance was a $4 million reduction in “Total liabilities” and a $4 million increase to “Total Prudential Financial, Inc. equity.”

In June 2014, the FASB issued updated guidance (ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures) that requires repurchase-to-maturity transactions to be accounted for as secured borrowings and eliminates existing guidance for repurchase financings. The guidance also requires new disclosures for certain transactions accounted for as secured borrowings and for transfers accounted for as sales when the transferor also retains substantially all of the exposure to the economic return on the transferred financial assets. Accounting changes and new disclosures for transfers accounted for as sales under the new guidance were effective for the first interim or annual period beginning after December 15, 2014, and did not have a significant effect on the Company's consolidated financial position, results of operations or financial statement disclosures. Disclosures for certain transactions accounted for as secured borrowings were effective for interim periods beginning after March 15, 2015, and are included in Note 4. The Company applied the modified retrospective method of adoption.

In April 2014, the FASB issued updated guidance (ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance became effective for new disposals and new classifications of disposal groups as held for sale that occur within annual periods that began on or after December 15, 2014, and interim periods within those annual periods, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In January 2014, the FASB issued updated guidance (ASU 2014-04, Receivables—Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) for troubled debt restructurings clarifying when an in-substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance became effective for annual periods and interim periods within those annual periods that began after December 15, 2014, and was applied prospectively. Adoption of the guidance did not have a significant effect on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In January 2014, the FASB issued updated guidance (ASU 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects) regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance became effective for annual periods and interim reporting periods within those annual periods that began after December 15, 2014. The Company did not elect the proportional amortization method under this guidance.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Future Adoption of New Accounting Pronouncements

In May 2014, the FASB issued updated guidance (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)) on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the guidance. In August 2015, the FASB issued an update to defer the original effective date of this guidance. As a result of the deferral, the new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017, and must be applied using one of two retrospective application methods. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In May 2015, the FASB issued final guidance (ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts) that aims to enhance disclosures about insurance contracts classified as short-duration. The new disclosure requirements focus on providing users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and timing, frequency and severity of claims as they relate to short-duration insurance contracts. The new guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, and is to be applied retrospectively. The Company is currently assessing the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations.

In January 2016, the FASB issued updated guidance (ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities) on the recognition and measurement of financial assets and financial liabilities. The guidance revises an entity’s accounting related to the classification and measurement of certain equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for annual periods and interim reporting periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted except for the provisions related to the presentation of certain fair value changes for financial liabilities measured at fair value. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In February 2016, the FASB issued guidance (ASU 2016-02, Leases (Topic 842)) that ensures assets and liabilities from all outstanding lease contracts are recognized on balance sheet (with limited exception). The guidance substantially changes a Lessee’s accounting for leases and requires the recording on balance sheet of a “right-of-use” asset and liability to make lease payments for most leases. A Lessee will continue to recognize expense in its income statement in a manner similar to the requirements under the current lease accounting guidance. For Lessors, the guidance modifies classification criteria and accounting for sales-type and direct financing leases and requires a Lessor to derecognize the carrying value of the leased asset that is considered to have been transferred to a Lessee and record a lease receivable and residual asset (“receivable and residual” approach). The guidance also eliminates the real estate specific provisions of the current guidance (i.e., sale-leaseback). The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In March 2016, the FASB issued guidance (ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting) to simplify the transition to equity method when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods. The guidance is to be applied prospectively to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method after the effective date. The Company does not expect the adoption of this guidance to have a significant impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

In March 2016, the FASB issued guidance (ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting) to simplify and improve employee share-based payment accounting. The areas updated include income tax consequences, a policy election related to forfeitures, classification of awards as either equity or liability, and classification of operating and financing activity on the statement of cash flows. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and for interim periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In June 2016, the FASB issued guidance (ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) that provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also modifies the current other-than-temporary impairment guidance for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing guidance for purchased credit deteriorated loans and debt securities. The new guidance is effective for financial statements issued by public entities for annual reporting periods beginning after December 15, 2019, and for interim periods within those annual periods. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact of the guidance on the Company’s consolidated financial position, results of operations and financial statement disclosures.

In August 2016, the FASB issued guidance (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)) to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods, with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently assessing the impact of the guidance on the Company’s statement of cash flows.

3. ACQUISITIONS

This section supplements, and should be read in conjunction with, the complete descriptions provided in Note 3 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2015.

Acquisition of Deutsche Bank’s India Asset Management Business

In March 2016, the Company and its asset management joint venture partner in India completed the previously announced acquisition of Deutsche Bank’s India asset management business through the joint venture. This acquisition, which will expand the Company’s investment management expertise, distribution platform and product portfolio in India, did not have a material impact on the Company’s financial results.

Acquisition of Administradora de Fondos de Pensiones Habitat S.A.

In March 2016, the Company completed the purchase of an indirect 40% ownership interest in Administradora de Fondos de Pensiones Habitat S.A. (“AFP Habitat”), a leading provider of retirement services in Chile, from Inversiones La Construcción S.A. (“ILC”), the investment subsidiary of the Chilean Construction Chamber. The Company paid 899.90 Chilean pesos per share, for a total purchase price of approximately $532 million based on exchange rates at the share acquisition date. The Company and ILC now equally own an indirect controlling stake in AFP Habitat through a joint holding company. The Company’s investment will be accounted for under the equity method and is recorded within “Other assets.” This acquisition will enable the Company to participate in the growing Chilean pension market.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

4. INVESTMENTS

Fixed Maturities and Equity Securities

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	20,359	$	5,403	$	37	$	25,725	$	0
Obligations of U.S. states and their political subdivisions	8,489		1,382		4		9,867		0
Foreign government bonds	86,008		22,522		130		108,400		0
U.S. corporate public securities	78,592		9,513		489		87,616		(9		)
U.S. corporate private securities(1)	29,905		2,789		226		32,468		(20		)
Foreign corporate public securities	27,185		3,619		155		30,649		(6		)
Foreign corporate private securities	20,645		966		616		20,995		0
Asset-backed securities(2)	10,318		178		121		10,375		(316		)
Commercial mortgage-backed securities	11,912		604		15		12,501		(1		)
Residential mortgage-backed securities(3)	4,332		319		3		4,648		(3		)
Total fixed maturities, available-for-sale(1)	$	297,745	$	47,295	$	1,796	$	343,244	$	(355	)
Equity securities, available-for-sale	$	7,197	$	2,611	$	43	$	9,765



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	965	$	341	$	0	$	1,306
Foreign corporate public securities	717		83		0		800
Foreign corporate private securities(5)	93		4		0		97
Commercial mortgage-backed securities	1		0		0		1
Residential mortgage-backed securities(3)	695		57		0		752
Total fixed maturities, held-to-maturity(5)	$	2,471	$	485	$	0	$	2,956

__________


(1)	Excludes notes with amortized cost of $1,127 million (fair value, $1,127 million) which have been offset with the associated payables under a netting agreement.


(2)	Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.


(3)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.

(4)

Represents the amount of OTTI losses in “Accumulated other comprehensive income (loss)” (“AOCI”), which were not included in earnings. Amount excludes $686 million of net unrealized gains on impaired available-for-sale securities and $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $4,165 million (fair value, $4,165 million) which have been offset with the associated payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI(4)
	(in millions)
Fixed maturities, available-for-sale
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	14,992	$	3,544	$	19	$	18,517	$	0
Obligations of U.S. states and their political subdivisions	8,089		747		41		8,795		0
Foreign government bonds	71,849		12,011		147		83,713		1
U.S. corporate public securities	70,979		6,344		1,955		75,368		(3		)
U.S. corporate private securities(1)	28,525		2,278		359		30,444		0
Foreign corporate public securities	26,354		2,821		621		28,554		0
Foreign corporate private securities	19,393		739		994		19,138		0
Asset-backed securities(2)	10,121		226		121		10,226		(452		)
Commercial mortgage-backed securities	10,337		195		70		10,462		(1		)
Residential mortgage-backed securities(3)	4,777		335		6		5,106		(4		)
Total fixed maturities, available-for-sale(1)	$	265,416	$	29,240	$	4,333	$	290,323	$	(459	)
Equity securities, available-for-sale	$	6,847	$	2,570	$	143	$	9,274



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in millions)
Fixed maturities, held-to-maturity
Foreign government bonds	$	816	$	196	$	0	$	1,012
Foreign corporate public securities	625		62		0		687
Foreign corporate private securities(5)	78		4		0		82
Commercial mortgage-backed securities	33		1		0		34
Residential mortgage-backed securities(3)	756		53		0		809
Total fixed maturities, held-to-maturity(5)	$	2,308	$	316	$	0	$	2,624

__________


(1)	Excludes notes with amortized cost of $1,050 million (fair value, $1,039 million) which have been offset with the associated payables under a netting agreement.


(2)	Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.


(3)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.


(4)	Represents the amount of OTTI losses in AOCI, which were not included in earnings. Amount excludes $693 million of net unrealized gains on impaired available-for-sale securities and less than $1 million of net unrealized gains on impaired held-to-maturity securities relating to changes in the value of such securities subsequent to the impairment measurement date.


(5)	Excludes notes with amortized cost of $3,850 million (fair value, $4,081 million) which have been offset with the associated payables under a netting agreement.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The following tables show the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities and equity securities have been in a continuous unrealized loss position, as of the dates indicated:



	September 30, 2016
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	2,818	$	37	$	0	$	0	$	2,818	$	37
Obligations of U.S. states and their political subdivisions	80		1		21		3		101		4
Foreign government bonds	2,133		112		296		18		2,429		130
U.S. corporate public securities	5,907		201		3,237		288		9,144		489
U.S. corporate private securities	1,926		114		1,482		112		3,408		226
Foreign corporate public securities	1,264		41		1,230		114		2,494		155
Foreign corporate private securities	2,692		183		4,773		433		7,465		616
Asset-backed securities	1,287		68		2,712		53		3,999		121
Commercial mortgage-backed securities	1,417		14		148		1		1,565		15
Residential mortgage-backed securities	64		2		89		1		153		3
Total	$	19,588	$	773	$	13,988	$	1,023	$	33,576	$	1,796
Equity securities, available-for-sale	$	699	$	42	$	12	$	1	$	711	$	43

__________


(1)	Includes $14 million of fair value and less than $1 million of gross unrealized losses at September 30, 2016, on securities classified as held-to-maturity, which is not reflected in AOCI.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)



	December 31, 2015
	Less than twelve months				Twelve months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
Fixed maturities(1)
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	3,068	$	19	$	0	$	0	$	3,068	$	19
Obligations of U.S. states and their political subdivisions	1,391		40		7		1		1,398		41
Foreign government bonds	1,925		82		411		65		2,336		147
U.S. corporate public securities	24,642		1,396		3,455		559		28,097		1,955
U.S. corporate private securities	6,996		266		802		93		7,798		359
Foreign corporate public securities	5,985		288		1,584		333		7,569		621
Foreign corporate private securities	6,199		340		3,917		654		10,116		994
Asset-backed securities	4,342		33		3,138		88		7,480		121
Commercial mortgage-backed securities	3,888		63		473		7		4,361		70
Residential mortgage-backed securities	558		4		119		2		677		6
Total	$	58,994	$	2,531	$	13,906	$	1,802	$	72,900	$	4,333
Equity securities, available-for-sale	$	1,862	$	142	$	11	$	1	$	1,873	$	143

__________


(1)	Includes $0 million of fair value and $0 million of gross unrealized losses at December 31, 2015, on securities classified as held-to-maturity, which is not reflected in AOCI.

The gross unrealized losses on fixed maturity securities at September 30, 2016 and December 31, 2015, were composed of $1,324 million and $3,750 million, respectively, related to high or highest quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $472 million and $583 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. At September 30, 2016, the $1,023 million of gross unrealized losses of twelve months or more were concentrated in the energy, utility and capital goods sectors of the Company’s corporate securities. At December 31, 2015, the $1,802 million of gross unrealized losses of twelve months or more were concentrated in the energy, consumer non-cyclical and basic industry sectors of the Company’s corporate securities. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company concluded that an adjustment to earnings for OTTI for these securities was not warranted at September 30, 2016 or December 31, 2015. These conclusions are based on a detailed analysis of the underlying credit and cash flows on each security. The gross unrealized losses are primarily attributable to general credit spread widening and foreign currency exchange rate movements. At September 30, 2016, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

At September 30, 2016, $9 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, approximately all of which had been in that position for less than six months. At December 31, 2015, $19 million of the gross unrealized losses on equity securities represented declines in value of greater than 20%, all of which had been in that position for less than six months. In accordance with its policy described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company concluded that an adjustment for OTTI for these equity securities was not warranted at September 30, 2016 or December 31, 2015.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The amortized cost and fair value of fixed maturities by contractual maturities at September 30, 2016, are as follows:



	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Due in one year or less	$	10,680	$	11,142	$	13	$	13
Due after one year through five years	47,613		52,034		191		203
Due after five years through ten years	61,574		67,850		610		685
Due after ten years(1)	151,316		184,694		961		1,302
Asset-backed securities	10,318		10,375		0		0
Commercial mortgage-backed securities	11,912		12,501		1		1
Residential mortgage-backed securities	4,332		4,648		695		752
Total	$	297,745	$	343,244	$	2,471	$	2,956

__________


(1)	Excludes available-for-sale notes with amortized cost of $1,127 million (fair value, $1,127 million) and held-to-maturity notes with amortized cost of $4,165 million (fair value, $4,165 million), which have been offset with the associated payables under a netting agreement.

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they are not due at a single maturity date.

The following table depicts the sources of fixed maturity and equity security proceeds and related investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in millions)
Fixed maturities, available-for-sale
Proceeds from sales(1)	$	7,585		$	6,016		$	21,939		$	21,059
Proceeds from maturities/repayments(1)	4,960			4,496			14,583			14,209
Gross investment gains from sales, prepayments and maturities	440			427			1,234			1,401
Gross investment losses from sales and maturities	(46		)	(73		)	(343		)	(170		)
Fixed maturities, held-to-maturity
Gross investment gains from prepayments	$	0		$	0		$	0		$	0
Proceeds from maturities/repayments	83			58			208			181
Equity securities, available-for-sale
Proceeds from sales	$	978		$	1,181		$	2,815		$	3,734
Gross investment gains from sales	177			167			425			594
Gross investment losses from sales	(30		)	(61		)	(137		)	(123		)
Fixed maturity and equity security impairments
Net writedowns for other-than-temporary impairment losses on fixed maturities recognized in earnings(2)	$	(29	)	$	(73	)	$	(166	)	$	(110	)
Writedowns for impairments on equity securities	(23		)	(60		)	(65		)	(77		)

__________


(1)	Includes $122 million and $267 million of non-cash related proceeds for the nine months ended September 30, 2016 and 2015, respectively.


(2)	Excludes the portion of OTTI recorded in “Other comprehensive income (loss),” (“OCI”) representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

As discussed in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, a portion of certain OTTI losses on fixed maturity securities is recognized in OCI. For these securities, the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in OCI. The following tables set forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts:



	Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
	(in millions)
Balance, beginning of period	$	424		$	532
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(76		)	(217		)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)	0			(2		)
Credit loss impairments recognized in the current period on securities not previously impaired	0			27
Additional credit loss impairments recognized in the current period on securities previously impaired	0			0
Increases due to the passage of time on previously recorded credit losses	5			17
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2		)	(6		)
Balance, end of period	$	351		$	351



	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
	(in millions)
Balance, beginning of period	$	751		$	781
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(187		)	(215		)
Credit loss impairments previously recognized on securities impaired to fair value during the period(1)	(6		)	(19		)
Credit loss impairments recognized in the current period on securities not previously impaired	0			3
Additional credit loss impairments recognized in the current period on securities previously impaired	1			2
Increases due to the passage of time on previously recorded credit losses	1			14
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(3		)	(9		)
Balance, end of period	$	557		$	557

__________


(1)	Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

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PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Trading Account Assets Supporting Insurance Liabilities

The following table sets forth the composition of “Trading account assets supporting insurance liabilities” as of the dates indicated:



	September 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	908	$	908	$	765	$	765
Fixed maturities:
Corporate securities	13,296		13,773		12,797		12,851
Commercial mortgage-backed securities	1,873		1,952		1,860		1,862
Residential mortgage-backed securities(1)	1,217		1,261		1,411		1,428
Asset-backed securities(2)	1,311		1,327		1,295		1,299
Foreign government bonds	784		813		680		694
U.S. government authorities and agencies and obligations of U.S. states	399		449		326		369
Total fixed maturities	18,880		19,575		18,369		18,503
Equity securities	1,223		1,345		1,030		1,254
Total trading account assets supporting insurance liabilities	$	21,011	$	21,828	$	20,164	$	20,522

__________


(1)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.


(2)	Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

The net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Other income,” was $84 million and $(251) million during the three months ended September 30, 2016 and 2015, respectively, and $459 million and $(517) million during the nine months ended September 30, 2016 and 2015, respectively.

Other Trading Account Assets

The following table sets forth the composition of the “Other trading account assets” as of the dates indicated:



	September 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions)
Short-term investments and cash equivalents	$	27	$	27	$	26	$	26
Fixed maturities	4,783		4,635